States continue to step up scrutiny of intercompany transactions
TAX BLOG |
States have historically challenged the state income tax benefits generated by intercompany transactions using a variety of approaches, including the application of intercompany addback rules and forced combination. Recently, states have been stepping up the use of these tools to combat what they perceive as tax-motivated base shifting and have been working to add a new set of more sophisticated tools to the toolbox.
For example, in 2015, the Multistate Tax Commission (MTC) launched its Arm’s-Length Adjustment Service (ALAS) program to assist states in performing state-specific transfer pricing studies. Although the ALAS program has been slow to take off, the MTC has doubled-down on the program by naming Marshall Stranburg, Florida Department of Revenue executive director, to be its deputy executive director, and broader state support is expected in 2016.
Further, states have been working to expand intercompany addback rules to apply to more transactions and to narrow applicable exclusions. For example, Louisiana recently enacted legislation that, effective Jan. 1, 2016, created an addback requirement for intercompany intangible, interest and management expenses.
Lastly, in relation to intercompany transactions between U.S. and foreign entities, states have been looking to expand their reach by enacting legislation to require combination of foreign tax haven entities. More than 10 states proposed tax haven legislation in 2015, and this issue is expected to make its way onto the legislative calendar of state legislatures across the country in 2016.
If your business engages in intercompany transactions, you should review these activities in light of the states' increased focus on this matter.